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Hormones Are Taking Over
Posted by: Federico Zaldua (IP Logged)
Date: September 10, 2013 09:36AM
According to Warren Buffett, the housing market is finally starting to grow after its catastrophic meltdown. In his own words, “Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while 'doubling-up' may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.” I strongly agree with Berkshire Hathaway (BRK.A)'s chairman.
Housing and, hence, construction should outperform most sectors in the coming years. After all, hormones are indeed taking over. According to data from the Center for Disease Control and Prevention, America's fertility rates stabilized for the first time in over five years. Here I want to take a look at my favorite housing-related stocks.
Betting on Cement Demand Growth[/size]
One of my favorite ways to play the housing game is the Mexican cement champion Cemex (NYSE: CX), a stock held by billionaire investor George Soros. Cemex, which makes 29% of its EBITDA in the US, is paying off debt fast after having gone through an acquisition spree during the real estate boom that went bust in 2008.
With the aim of reaching its 2014 net debt to EBITDA target of 4.5 times, Cemex sold 29% of its Latin American operations (for $1.1billion), sold off non-core assets across the globe and re-structured its debt profile.
The U.S. is the crucial playground where the company is expecting to grow its volumes and recover its former financial strength. In the U.S., Cemex expects to grow year-over-year cement volumes by as much as 13% this year and by as much as 10% in 2014. Actually, I expect strong momentum to gain traction towards the end of 2013 as pricing across its portfolio continues to ameliorate and cost reduction strategies maintain margins on an upward trend.
Even when I expect the company to continue generating losses until 2015, I also do expect free cash flow to grow beyond the 100% mark between 2013 and 2014. Trading at 2013 9.5 times EV/EBITDA, I think its time to start looking at Cemex in a serious way.
Hormones Will Help This Company's Recovery
Beazer Homes USA (BZH), the diversified home-builder which is held by Mario Gabelli from GAMCO Investors, is my top play among single-family and multi-family home builders. While I believe higher interest rates should slow the pace of margin expansion for Beazer, I also believe higher top line growth will more than compensate interest rate effects on net earnings. As a matter of fact, I think gross margins are going to go north of 17.5% by the end of 2014 while top-line should keep on growing at a rate of 25%.
At this rate, I forecast Beazer to generate its first positive net earnings in many years as soon as 2014, when EBITDA should grow by more than 95%. At this current point in time, I think Beazer is the ultimate growth play among home-builders.
Following the oracle of Omaha or George Soros in never a bad idea when you are trying to put your money to work. I think both Cemex and Beazer shall profit enormously from the on-going housing recovery. They are both good options if you plan to add “housing and construction” to your portfolio.
Guru Discussed: George Soros: Current Portfolio, Stock Picks
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Stocks Discussed: BRK.A, CX, BZH,